The Truth About Index Investing

3 different ETF strategies
for your portfolio

In any market environment, staying on top of your investment mix can be key. For many investors, so-called "passive" funds – index mutual funds and ETFs – have, perhaps counterintuitively, proven useful in making active moves.

We believe investors can best seek to reduce volatility and capture opportunities in their portfolios by keeping it simple and focusing on two key things:

  • 1. Diversification
  • 2. Selectivity

But how can you be both broadly diversified and selective with your investment choices? You may find what fits the bill is a strategy that seeks to leverage both the active and passive worlds of money management.

"Passive" funds don't mean that you're putting your portfolio on autopilot, simply deploying investments as pre-determined by some algorithm. Investors are still the stewards of their own portfolios, no matter what fund format they choose.

Don't sit on the sidelines

The BlackRock Global Investor Pulse has shown that most Americans are over-allocated to cash– and the truth is that, historically speaking, cash is not usually an effective long-term strategy. Trying to ride out market uncertainty by selling low and sitting on the sidelines until the market steadies itself means you're more likely to buy high and miss growth opportunities.

Consider that over the past 20 years, a decision to remain consistently invested in the S&P 500 Index of U.S. stocks would have turned a $100,000 investment into $441,141. Missing just the best five days during that 20-year period reduces the ending value to $292,650. Missing the best 25 days, $100,000 would have only grown to $110,920.1

You may prefer to manage your portfolio by doing your own research and picking specific stocks and bonds. But you don't have to miss out on market returns in the meantime. With ETFs, you can stay actively invested and capture the ups with the downs.

Diversify your core

When investing for the long term, ETFs are a low-cost way to build and diversify the core of your portfolio. With just a few funds, you can get a broad representation of companies and sectors from around the world. You can select ETFs that focus on stocks, bonds, or commodities, as well as those weighted to target certain factors like growth or value. Some multi-asset funds are specially designed to aim for the level of risk you are willing to take while seeking to achieve your financial goals.

And these diversified ETFs can be significantly cheaper to own than similar active funds, potentially saving you thousands of dollars over 10 or more years.

By using ETFs as the foundation of your portfolio, you can then try to be more tactical by selecting other types of investments that reflect your market views.

Get precise

Another thing to note about ETFs is that they can also be an easy way for investors to precisely target the asset classes, geographic regions or industry sectors that look attractive over the near- or medium-term. With such a wide range of ETFs out there, investors can find funds targeting investments as particular as Qatar, semiconductors, or sustainable energy.

The markets are always uncertain and picking the right investments over the long term isn’t easy, but ETFs can help you navigate the ups and downs.